I have just returned from the 2010 International Conference on Sustainability: Energy, Economy & Environment in Michigan. Speaking at this conference were two individuals who have a good understanding of how the deflationary credit contraction will unfold. This is important for investors to understand as what they hear via mainstream media is always going to be tainted with corporate or government interests. How this relates to one’s investments can be critical for future planning.
These two speakers were Nicole Foss from “The Automatic Earth” and Professor Steve Keen, recipient of the Revere Award from the Real World Economics Review for the economist who most cogently warned of the economic crisis. In this article I will address Nicole Foss’s views on how the deflationary credit contraction will unwind, saving the more technical analysis of Steve Keen for a subsequent article.
Deflation and Credit; the Missing Link
Before going into detail as to what was discussed at the conference, it’s important to have an understanding of the definition of deflation. There are various definitions passed around, but only one that takes into account “credit” along with monetary easing or printing.
Without incorporating into any analysis the unwinding of the credit that was created during the inflationary expansion period, one can not rationalize how quantitative easing is being swallowed up today.
Also, what’s needed to be pointed out in this analysis is the fact that banks weren’t lending since the peak of the real estate bubble. This means there was no additional fractional reserve expansion of the money supply (inflation) occurring since the banks quit lending.
In fact, much of the original bout of quantitative easing amounting to $2 trillion went to the banks to help shore up their balance sheets from their abuses of fractional reserve lending during the credit expansion. The banks were in dire need of cash and without it, more would have failed.
Inflation vs. Deflation
For those who keep screaming “inflation, inflation, inflation,” and have recently been riding the wave of higher prices in oil and food commodities, along with gold and silver, how do they explain why after the first $2 trillion of quantitative easing prices were falling and treasuries and the U.S. dollar were stronger? Where was the result of the quantitative easing (inflation), higher prices, then?
They may point to gold, but the Yen price of gold has risen the entire deflationary episode of Japan the last 15 years. The gold price moving higher in all currencies is an indication of where investors place value, inflation and deflation aside.
The inflation hawks may try to explain it away by saying the CPI didn’t point out the true picture of inflation. But hasn’t real estate been deflating since 2007? Doesn’t the CPI only take into account equivalent rents which at the time were falling? Can certain assets not related to government involvement (oil, food and other commodities), be cherry picked to make an overall claim of inflation when they are just temporary increases in price in an overall decline since their peak?
What will the inflation hawks say when the price of oil starts to fall? How about food prices? Haven’t both of these commodity categories fallen the last couple of weeks? How will they explain this away, especially with the quantitative easing occurring?
In the short term, anything can happen because the Fed has new powers given to them by congress and no one knows what they will do because they can’t be audited. But their effectiveness is what I question for the medium term. Timing is the only issue. Planning today for what is to come is what’s needed.
Technically, the U.S. dollar rising during this time can be explained away by simply pointing out the Euro, which makes up 57.6% of the Dollar Index, was falling with the problems of Greece unfolding and the threat of other European countries imploding. However, most other prices of commodities were falling. The price of gold and silver were rising, but I believe it was because it just isn’t the U.S. citizens clamoring for gold and silver any longer; it’s the world.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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